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Expensive Free Trade

This article was published in Investor’s Business Daily, November 26, 2004.

Before leaving office late last month, Pascal Lamy, the EU’s outgoing trade commissioner, proposed to open European markets to imports from the developing world. It sounded good, but that proposal comes with strings attached: only those countries that adopt 27 international conventions on sustainable development and labor and environmental standards will be deemed worthy of greater access to Europe’s common market.

Lamy’s proposal is a negotiating ploy to split the small countries from more powerful members of the developing bloc, such as India, Brazil, and South Africa, that have stood up to rich countries. It is a con that may, if it goes forward, undermine developing world economies and prevent millions of people from escaping poverty.

Development economists have, for decades, advocated increased trade between rich and poor countries as the best way to combat developing-world poverty. Empirical evidence suggests that people in countries that are more economically integrated with the rest of the world enjoy a higher standard of living. According to the Fraser Institute’s Economic Freedom of the World report, gross domestic product (GDP) per capita in the quintile of countries with the most restricted trading was only $1,883 in 2002. However, the 2002 per capita GDP in the quintile of countries with the freest trading regimes was $23,938.

The benefits of free trade were not always appreciated. After World War II, most developing countries tried to achieve prosperity through protectionism. Imports were seen as a drag on capital formation, which was deemed a prerequisite for economic development. Instead, developing countries tried to use intergovernmental aid to spur economic growth. That approach did not work. Many poor countries today are heavily indebted but remain underdeveloped. No wonder that Uganda’s President Yoweri Museveni stated during his 2003 visit to Washington, “I don’t want aid; I want trade. Aid cannot transform society.”

To be sure, developing countries have a long way to go in liberalizing their trade regimes. The average tariff in the developing world was 12.7 percent in 2001. The poorest subset of developing countries, so-called low-income nations, maintained average tariffs of 14.8 percent. In comparison, high-income OECD countries had an average tariff of 3.7 percent. Still, most observers agree that developed countries can do more to end poverty in the developing world: namely, they can open up to the developing world’s exports. The trouble is that trade liberalization in wealthy countries is often preconditioned on poor countries’ acceptance of environmental and labor regulations detrimental to competitiveness and economic growth.

Swedish author Johan Norberg points out that the European industrial revolution did not have to contend with stringent environmental and labor regulations. After Europe developed and the standard of living increased, however, many people became willing to pay a premium for commercial goods that were produced in an environmentally friendly way. Increased efficiency of production and the concomitant reduction of waste contributed to better quality of the environment. But, as Norberg explains, “environmental quality is unlikely to be a top priority for people who barely know where their next meal is coming from.”

That is exactly the sort of sentiment I observed during the 2002 World Summit on Sustainable Development in Johannesburg, South Africa. Poor countries united against an attempt by the EU, environmental groups and labor unions to constrain economic growth in the developing world. They recognized that what their wretchedly poor citizens require is cheap, rather than renewable, energy. They also understood that less-than-ideal jobs are better than no jobs at all.

The failure of the EU to achieve its agenda through multilateral negotiations, such as the World Summit on Sustainable Development, proved to be only a temporary setback. The EU has decided to use bilateral negotiations to win concessions from poor countries. As such, the EU offers duty-free access for 7,200 products from the world’s poorest countries. In exchange, those countries have to sign on to the Kyoto protocol on global warming, the Cartagena protocol on genetically modified organisms, and a plethora of international labor agreements. Poor countries’ accession to those treaties will slow down economic growth in the developing world.

Developing countries ought to pursue pro-growth domestic reforms and liberalize no matter what the EU does. Increased economic openness will result in increased productivity that will more than compensate for the already low external tariffs that the EU imposes on imports from overseas. There is, in other words, no compelling reason why Europe’s scandalous attempts to force its Luddite and protectionist agenda on weaker and poorer nations should not be resisted.